Business & Finance Taxes

What Expenses Can Be Deducted From Income Taxes?

By Business & Finance Last updated Friday, May/31/2024

Reduce your tax liability with deductions for expenses.TAX TIME image by brelsbil from Fotolia.com

When filing your personal income tax return, Form 1040, you should be aware of the various expenses that can be deducted. Although this is a confusing area for many taxpayers, deductions save money. Deductions represent expenses you paid during the year that you can claim back from the government and thus reduce your taxable income. Reducing your taxable income reduces your tax liability. A lower tax liability means a lower tax bill. A lower tax bill may result in a refund. You will only owe money with your return if your tax liability has not been met from federal income tax withholdings that have been taken out of your paycheck.

Mortgage Interest and Points

Mortgage interest expenses and points, which are reported by the lender of your mortgage on Form 1098, are deducted on line 10 of Schedule A. The principal portion of mortgage payments is not allowed to be deducted. First and second mortgages on a home as well as home equity lines of credit may be deducted. Mortgage interest on a primary residence, vacation home or mobile home is eligible for a deduction.

Real estate taxes are deducted on line 6 of Schedule A. If you pay your real estate taxes in conjunction with your mortgage payments, Form 1098 will reflect the real estate tax payments you made during the year. You can deduct real estate tax payments made on properties not used in a business. Therefore, if you paid real estate taxes on your primary residence as well as a vacation home, the total real estate taxes paid on both homes is deductible. If you received a property tax rebate during the year, you must reduce the amount of real estate taxes you are deducting by the rebate amount.

Medical expenses eligible for deduction include doctor visit fees, laboratory fees, hospital and surgery costs, insurance premiums not paid by your employer, dental fees and prescription costs. Some often-overlooked deductions include eyeglasses, contacts, weight-loss program costs if associated with a specific disease and diagnosed by a doctor, smoking cessation program costs, and hotel costs if seeking medical care away from home--up to a maximum of $50 per night. Medical expenses specifically disallowed by the IRS include cosmetic surgery, diet foods, nonprescription medications and the costs of travel associated with a trip for much needed rest upon the advice of your doctor. Total annual medical expenses are reported on line 1 of Schedule A. Deduct the portion of medical expenses greater than 7.5% of your adjusted gross income (AGI). For example, if your AGI is $30,000 and you spent $5,000 on medical expenses, you can deduct $2,750 in medical expenses ($30,000 times 0.075 = $2,250; $5,000 less $2,250 = $2,750).

Certain job expenses are eligible for deduction. The deduction is only allowed for the portion of job expenses greater than 2% of your AGI. Job expenses include union dues, teacher material fees greater than $250, cost of uniforms which are not able to be worn outside the work environment, small tools and safety equipment, professional journal subscriptions and employment agency fees to search for a new job in your current field, even if you do not get a job.